Idfc Cover For Core Sector Bonds Mooted
The government is proposing a new guarantee mechanism, under which Infrastructure Development Finance Company (IDFC) will provide comfort to banks and financial institutions extending 10-15 year loans by guaranteeing the bonds towards the end of their maturity.
Disclosing this in an exclusive interview to Business Standard, special secretary (banking) C M Vasudev said the proposed mechanism would help prevent asset-liability mismatches in the case of banks and financial institutions advancing loans to infrastructure projects.
The biggest problem in infrastructure finance is the large mis-match between assets and liabilities. Even the funds which are available with financial institutions have a maturity of only five-seven years. Whereas for infrastructure projects, the asset side maturity has to be 10-15 years, said Vasudev.
IDFC is thinking in terms of having relations with other lending institutions to pick up latter maturities of their loans. For example, if IDBI or ICICI gives a seven-year loan, then IDFC would pick up the asset for the latter three years (if the asset maturity is for 10 years). So that is the credit enhancement they plan to do.
Therefore, the IDFC should not be considered another financial institution, said Vasudev. It is, in fact, an institution promoted for financing long term instruments, he pointed out.
The government may also revive its earlier proposal to set up an Asset Reconstruction Fund (ARF) to clean up bad debts of weak public sector banks. The ARF, as construed by the Narasimham Committee report in 1991, was an arrangement under which at least a part of the bad and doubtful debts of banks and financial institutions would be taken off the balance sheet at a discounted value.
The committee had proposed the establishment of ARF, if necessary by a special legislation, and recommended that the level of discount be determined by independent auditors on the basis of clear guidelines.
The ARF was to be provided with special powers for recovery, and the capital of the ARF was to be subscribed to by public sector banks and financial institutions. The concept, however, did not win the approval of public sector banks banks.
For various reasons, when the recommendation was processed at that time it was felt that an ARF could pose problems, such as who would fund it, how would the assets of the banks be valued, who would provide the money to buy out the assets at discounted value, and who would do the recovery of those loans, Vasudev said.